Businesses with high fixed costs do well when demand is strong and driving healthy volumes, but the other side of the cycle can take a painful bite out of margins, and that’s what Carpenter Technologies (CRS) is seeing today. Aerospace demand hasn’t exactly evaporated, but it’s been hit hard by steep declines in flight hours (which drive demand for replacement/maintenance parts) and slashed production schedules, and there’s really not much else to pick up the slack and keep those forges and production lines full.
Given how tied Carpenter is to the outlook for aerospace, I’m not surprised that the shares have traded higher recently on the good news on COVID-19 vaccine efficacy. Even with that in hand, though, it’s going to be a few quarters before revenue stabilizes, and a while longer until there’s meaningful growth and operating leverage.
When I last wrote about Carpenter, I saw upside to the mid-to-high $20s, and I’d still stand by that today (maybe even up to $30). I do believe the business is unlikely to get much worse from here, but I don’t have a lot of love for these shares beyond a trading opportunity. Specialty alloys sounds like it should be a more impressive business than it is, and while I do see some potential in the company’s soft magnetics and additive manufacturing efforts, I think sustained differentiation and truly impressive full-cycle ROICs are unlikely.
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Carpenter Technology Is Just A Passenger Now As The Aero Cycle Sorts Itself Out
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